Home Value Investing Tilson “Rebuilding the Portfolio After Hitting the Reset Button”; Biggest Short Positions: WING, EXAS, HLF, WRLD

Tilson “Rebuilding the Portfolio After Hitting the Reset Button”; Biggest Short Positions: WING, EXAS, HLF, WRLD

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From Whitney Tilson’s 2016 letter to investors – also his latest email – both excerpted below


2016 Hedge Fund Letters

1) Attached is my 2016 annual letter, in which I discuss the year, our 10 largest long positions (including three new ones: Mondelez, CSX and Pershing Square Holdings, now my first, second and ninth largest positions), four shorts, and my macro views.

2) I enjoyed this 76-minute video of Buffett and Gates, moderated by Charlie Rose, at Columbia University last week: www.youtube.com/watch?v=8K9QvPGHug0


3) What a blast from the past: nearly 20 years ago (on 4/30/97), the Motley Fool web site (which I used to write for), in its “Rule Breaker Portfolio”, shorted the stock of Trump Hotels and Casino Resorts (DJT). More than two years later, 18-year-old Ivanka said to her father: “Daddy, the Fools say that you have a crummy company”, so Trump invited them to come meet with him – and charmed them into covering their short (mainly by telling them a bunch of things that – surprise! – later turned out to be totally disconnected from reality). David Gardner wrote:


…following our meeting with Trump, we no longer believe that DJT will go bankrupt anytime soon. Perhaps Trump is just a convincing salesman, with nothing to back it up. All the talk is about the future. I really don’t know; perhaps I don’t have enough of the “e-word” (Experience) to evaluate this yet. “I give you my word,” he said, looking us straight in the eye. “We are totally focused on reducing the debt, paying off the debt, and increasing cash flow.” We are willing to give him the benefit of the doubt. If he follows through, our short will certainly not be profitable from here. A big “if,” right? No doubt about that.



I’ll let you decide what lessons can be learned from this (and the rest of Trump’s business history)…


4) I love Howard Schultz – what an exemplar!

We are living in an unprecedented time, one in which we are witness to the conscience of our country, and the promise of the American Dream, being called into question…I am hearing the alarm you all are sounding that the civility and human rights we have all taken for granted for so long are under attack…

I also want to take this opportunity to announce specific actions we are taking to reinforce our belief in our partners around the world and to ensure you are clear that we will neither stand by, nor stand silent, as the uncertainty around the new Administration’s actions grows with each passing day:

5) A very entertaining article about Trump’s biggest Wall St. supporters:

Since the election, much of the rest of Wall Street has come around to Trump, thanks to the rising stock market and the ascension of so many of their own. “What he is doing on the business side makes sense,” said Marc Lasry, a longtime Hillary Clinton supporter who will not be taking a role in this administration. “Wilbur will do a good job. He’s made a lot of money, now he wants to serve his country, do something different. Carl is a pure business guy, so he’s going to recommend things that are good for him. Anthony is going to be there explaining things.”

Like others, Lasry had been heartened by the appointment of Gary Cohn, until recently the president at Goldman Sachs, to head the National Economic Council. A Democrat close to Trump’s son-in-law, Jared Kushner, Cohn is regarded to be, at the very least, smart, sane, and rational. “Gary’s not going to do anything to screw up his reputation,” said a colleague from his old firm.


6) Krugman with an interesting analysis of how things have changed vis-à-vis government borrowing/spending now that we’re getting close to full employment:

Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied, in which virtue was vice and prudence was folly. In particular, deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

This diagnosis — shared by most professional economists — didn’t come out of thin air; it was based on well-established macroeconomic principles. Furthermore, the predictions that came out of those principles held up very well. In the depressed economy that prevailed for years after the financial crisis, government borrowing didn’t drive up interest rates, money creation by the Fed didn’t cause inflation, and nations that tried to slash budget deficits experienced severe recessions.



7) A great contra-indicator:

Still, the firm’s outlook appears out of step with a market that has climbed over the past few years and rallied sharply since the presidential election. In June 2015, Mr. Grantham said the Federal Reserve had artificially compressed interest rates, sending the market toward what he termed “bubbleland.”

In November, Mr. Inker wrote to clients that “almost all asset classes are priced at valuations that seem to guarantee returns lower than history.” Mr. Inker added that “from today’s valuation levels, there are no good outcomes for investors.”

To be sure, GMO’s troubles are shared by other value-oriented investors who have underperformed in recent years as growth stocks climbed. If the market hits a rough period, GMO’s caution will look prescient once again, and clients likely will return.

“Expensive markets have historically provided very poor risk-reward trade-offs,” Mr. Inker says. “Our belief in the power of value has not wavered, it does not make sense to chase expensive markets ever higher.”

8) Here’s Fortune’s commentary about the WSJ article below:




9) What an extraordinary story/man – a true exemplar!

Nearly five years ago, Charles F. Feeney sat in a cushy armchair in an apartment on the east side of Manhattan, grandchildren’s artwork taped to the walls, and said that by the end of 2016, he was going to hand out the last of a great fortune that he had made.

It was a race: Mr. Feeney was then 81, and Atlantic Philanthropies, a collection of private foundations he had started and funded, still had about $1.5 billion left. Flinging money out the window or writing checks willy-nilly was not Mr. Feeney’s way.

Last month, Mr. Feeney and Atlantic completed the sprint and made a final grant, $7 million to Cornell University, to support students doing community service work.

He had officially emptied his pockets, meeting his aspiration of “giving while living.” Altogether, he had contributed $8 billion to his philanthropies, which have supported higher education, public health, human rights and scientific research.


PS—Below is an article the same journalist wrote about Feeney – 20 years ago!

CHUCK FEENEY wandered invisibly up 52nd St. the other day and turned in to the ’21’ Club. He looked a bit miserable because he was about to give a speech in semi-public. It was a first, and a last. Feeney is what Donald Trump would be if he lived his entire existence backward.

In complete secrecy, Feeney gave about $3.5 billion to charity over the last decade or so. Please spell that “billion,” with a B. Somehow, he managed to become the biggest donor in American history bigger than the Rockefellers, the Carnegies, the Mellons without nailing a single plaque to a museum wall or feeding a bold-face item about himself to the gossip columns. All the charity only became public earlier this year, after he sold the last of his business interests.

That Feeney is a private man who could walk a dozen blocks from his office to the speech without a single person pointing to him must bewilder the sort of business titans who are addicted to publicity about their own genius and generosity.
2016 letter – excerpt below

Short Positions Here are brief updates on four of our 10 short positions, ranked in descending order of size:

Wingstop Wingstop is in the chicken wing restaurant franchise business, with 949 restaurants in 40 states (93% of units) and 6 countries. Wingstop is a decent company with reasonable growth prospects, but its business is largely undifferentiated and faces ferocious competition from all sides. It has

only proved that its business and brand work in two states, yet its valuation assumes that it can scale rapidly across the U.S. and abroad, a highly questionable proposition. Given that the stock is currently priced for perfection at 56x earnings, 32x EBITDA and 11x revenues, if I’m wrong, it has little upside – and if I’m right, look out below… For further details, see my presentation at the Robin Hood Investors Conference last November.

Exact Sciences Exact appeared to well on its way to bankruptcy less than a year ago, but instead rose from the ashes after the U.S. Preventive Services Task Force issued its final colorectal cancer screening recommendations, which granted the company’s colon cancer test equal standing among the many other included screening tests. The company has spent massive sums on marketing, including a national television campaign, but this has only resulted in modest growth, far below what is needed to justify this company’s $2+ billion market cap, because the test is much too expensive, offers minimal benefits (somewhat better cancer detection, but at the cost of a much higher false positive rate) and, most importantly, customers don’t like having to poop in a bucket and then mail it to the company. I continue to believe that it’s a $3 stock at best, for reasons I outlined in this article and in my latest presentation at the Robin Hood Investors Conference.

Herbalife On July 15th, Herbalife’s stock rose sharply when it announced a settlement with the FTC in which it agreed to pay a $200 million fine and overhaul its business, which the FTC found to be a pyramid scheme (though it carefully avoided using those two words). I anticipated the settlement and stock’s reaction, so had only a small position, and used the rally to add materially to our short position in the mid-$60s (the stock ended the year at $48.14). I think the settlement agreement has real teeth, so Herbalife will have to clean up its predatory business, leaving only its legitimate business, which I believe is quite small and certainly can’t support the company’s nearly $6 billion enterprise value. In addition, Herbalife recently disclosed that it is still being investigated by the Securities and Exchange Commission for its “anti-corruption compliance in China,” its primary growth market which accounted for 20% of its sales in 2016.

World Acceptance World Acceptance, a predatory subprime installment lender, rallied after Trump’s election on hopes that the new administration would rein in the Consumer Financial Protection Bureau, which has been investigating World for years and which, on August 7, 2015, notified the company that “the staff of CFPB’s Enforcement Office is considering recommending that the CFPB take legal action against the Company [because it] violated the Consumer Financial Protection Act of 2010.” I’m surprised that the CFPB has taken so long to act, but when it does, I expect that it will take strong action to rein in World. In the meantime, the company is trying to stave off regulatory action by ending the worst of its abuses, which is causing the business to suffer: in the fourth quarter, revenues and earnings per share fell 6.4% and 35.3%, respectively, which is why the stock fell 25% in January.

Full PDF below

Kase Fund annual letter-2016

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